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American Economic Journal: Applied Economics: Vol. 3 No. 1 (January 2011)

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Minimum Wages and Firm Profitability

Article Citation

Draca, Mirko, Stephen Machin, and John Van Reenen. 2011. "Minimum Wages and Firm Profitability." American Economic Journal: Applied Economics, 3(1): 129-51.

DOI: 10.1257/app.3.1.129

Abstract

We study the impact of minimum wages on firm profitability, exploiting the changes induced by the introduction of a UK national minimum wage in 1999. We use pre-policy information on the distribution of wages to implement a difference-in-differences approach. Minimum wages raise wages, but also significantly reduce profitability (especially in industries with relatively high market power). This is consistent with a simple model where wage gains from minimum wages map directly into profit reductions. There is some suggestive evidence of longer run adjustment to the minimum wage through falls in net entry rates. (JEL J31, J38, L25)

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Authors

Draca, Mirko (Centre for Economic Performance, London School of Economics and U College London)
Machin, Stephen (Centre for Economic Performance, London School of Economics and IZA, Bonn)
Van Reenen, John (Centre for Economic Performance, London School of Economics and IZA, Bonn)

JEL Classifications

J31: Wage Level and Structure; Wage Differentials
J38: Wages, Compensation, and Labor Costs: Public Policy
L25: Firm Performance: Size, Diversification, and Scope

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